Tesco – profits jump 14% as shoppers vote with their feet

• Tesco Group first half sales rose 8.4% to £30.8bn, underlying operating profit up 13.9% to £1.5bn
• Market share gains partly driven by shoppers switching from premium retailers, with UK & Ireland volumes of Tesco Finest goods up 4.1%
• Overall trading better than expected, leading to an upgrade of full year expectations

Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown:

“It seems Tesco’s performing its own supermarket sweep, knocking competition out the way in the process and loading up on market share. As a full-line retailer it maintains an edge over the likes of Lidl and Aldi where you can’t quite find some more obscure ingredients. The enormous investment Tesco’s put in to being more affordable has also helped retain and attract customers while inflation’s been running so hot. Inflation has fallen across the first half as Tesco has been able to normalise some pricing. Of particular note is the success of Tesco Finest. People are saving by treating themselves at home instead of going out and Tesco has been building out its more premium offering. The wait to catch that extra demand is now paying off.

Shoppers are also voting with their feet and walking in Tesco’s direction away from higher-end supermarkets. While cost-of-living pressures are easing in the grocery aisles, they’re by no means gone and with Tesco’s posher items growing in number, it’s able to meet squeezed premium shoppers with open arms.

Tesco’s progress has been remarkable, and largely possible because of its enormous scale. But there are challenges. Aldi and Lidl may not be an existential threat, but they are nabbing shoppers from bigger names. The real test will be Christmas, where consumers will want to put on as much of a feast as possible, but where wallets may not allow it. We could be faced with a race to the bottom on festive pricing, which could spell trouble for margins. The price environment is already a very tricky one, and while the slight upgrade to retail operating profit expectations is welcome, growth in this area isn’t exactly super-charged.”